*74 Decision will be entered for the petitioners.
Intrafamily partnership transaction held not to result in taxable gift under Internal Revenue Code, section 1002, upon showing that new partners contributed adequate services and business lacked valuable assets.
*849 These proceedings seek redeterminations of deficiencies in gift tax for the year 1941 as follows: Willoughby J. Rothrock (No. 7781), $ 1,320; and W. Walter Thrasher (No. 7782), $ 7,920. A penalty for late filing of $ 330 is also in issue in the case of Willoughby J. Rothrock.
The issue presented is whether a taxable gift ensued from a transaction whereby sons of the respective petitioners became associated with them as partners in their brokerage and commission business in foodstuffs.
A stipulation of facts, supplemented by further evidence adduced at the hearing, comprises the record. The following includes a summary of the former, as well as facts found from the other evidence.
FINDINGS OF FACT.
The stipulated facts are hereby found accordingly.
Petitioner W. Walter Thrasher resides at*75 Philadelphia, Pennsylvania. He was born on June 12, 1881, and his immediate family is one son, Linton A. Thrasher, who was born September 19, 1908. His Federal gift tax return for the year 1941 was filed with the collector of internal revenue for the first collection district of Pennsylvania on March 16, 1942.
Petitioner Willoughby J. Rothrock resides at Jenkintown, Pennsylvania. He was born on September 7, 1890, and his immediate family consists of his wife and two sons, Willoughby J. Rothrock, Jr., and John H. Rothrock. John was born August 2, 1918. Petitioner Rothrock filed a Federal gift tax form for the calendar year 1941 on October 9, 1944, with the collector of internal revenue for the first collection district of Pennsylvania (Philadelphia).
Under a partnership agreement effective January 1, 1941, a brokerage and commission business in foodstuffs was formed under the name of Thomas Roberts & Co. The agreement was between the two petitioners, their sons John and Linton, as "General Partners," and Wainwright Churchill, "Limited Partner." It provided, in part, that the limited partnership was formed under the "firm name of Thomas Roberts & Co., for the continuance of the*76 transaction of a general brokerage and commission business in foodstuffs and grocery specialties in the manner in which such business has heretofore been conducted by some of the parties hereto"; that the firm name might be such other name as thereafter mutually agreed upon by the general partners, with the written consent of the limited partner; that the partnership was to exist "for the term commencing January 1, 1941, and ending December 31, 1945, both inclusive, and thereafter from year to year unless ninety (90) days notice * * * [was] given prior to the expiration of any year"; that any partner could "retire at the end of any calendar year by notice in writing given to all the other partners prior to *850 November 1 of such year"; that questions of policy or management were to be determined by a majority in interest of the general partners; that each partner was to devote all of his time and attention to the business of the partnership and not directly or indirectly engage in any other business without the consent of all the other general partners; that the original capital was $ 118,000, which was contributed by the several partners in the following amounts:
| By the general partners: | |
| W. W. Thrasher [petitioner] | $ 15,000 |
| W. J. Rothrock [petitioner] | 30,000 |
| L. A. Thrasher | 40,000 |
| John H. Rothrock | 8,000 |
| By the limited partner: | |
| Wainwright Churchill | 25,000 |
*77 It was provided that the amount of capital contributed by any general partner could be increased at any time, but that no partner's contribution to capital could be withdrawn during the term of the partnership except as specifically provided in designated portions of the agreement; that the limited partner should receive as his "share of the profits or other compensation by way of income" 6 per cent per annum of his cash contribution; that the general partners should receive from the partnership a weekly "salary" as follows:
| W. W. Thrasher | $ 150 |
| W. J. Rothrock | 100 |
| Linton A. Thrasher | 100 |
| John H. Rothrock | 35 |
It was also provided that in default of the payment to the limited partner the salaries to the general partners would cease, not to be resumed until the default was cured; that each general partner should receive semiannually from the partnership 6 per cent interest upon his contribution to the capital of the partnership, conditioned upon the absence of defaults in the payment to the limited partner; that at the end of each calendar year a determination of net profits or losses should be ascertained, after deducting all amounts paid as salaries and interest, and the*78 net profits or losses shared by the general partners as follows:
| Per cent | |
| W. W. Thrasher | 30 |
| W. J. Rothrock | 25 |
| Linton A. Thrasher | 30 |
| John H. Rothrock | 15 |
And that all or any part of the net profits for any year might "at the election of the majority in interest of the general partners, be paid to the several general partners in cash, or * * * [might] be retained in the business," and credited to the capital account of the several general partners in the proportions aforesaid; that losses *851 should be made good by the general partners in cash or by charges against their contributions to capital as a majority in interest decide; that the inability by reason of insolvency of a general partner to make good a loss should be borne by the other general partners; that the limited partner's capital contribution should not be resorted to until all capital contributions of the general partners were exhausted; that the death or retirement of a limited partner should not affect the continuity of the business; that the death of a general partner should not affect the continuity of the business by the surviving partners; that within thirty days after the death of a general partner*79 the partnership should pay to his legal representatives one-half of his capital account, the estate of the deceased partner to participate in the partnership until the end of the calendar year in which death occurred, except for the provision for salary; that at the end of such calendar year the business was to be liquidated as later provided; that on retirement of a general partner the business was also to be liquidated as later provided; that if the remaining partners should desire to continue the business the value of the partnership was to be calculated in accordance with the books and the remaining partners pay the full book value of the eliminated interest; that upon termination of the partnership the contribution of the limited partner, plus interest, should be returned to him; that on termination a distribution of assets should be in the following order of priority:
1. Debts and liabilities
2. Limited partner's contribution and unpaid interest
3. Unpaid salary to general partners
4. General partners' contributions and unpaid interest
5. General partners' shares in undistributed profits
It was further provided that on such liquidation a failure of the parties to agree*80 "upon the division of the partnership affairs then on hand, the whole of the assets of the firm or such part thereof as may then be repaid or as to which the general partners cannot agree, shall be sold to the best possible advantage and the proceeds of such sale divided and applied as hereinbefore provided, and there shall be no allowance in the settlement of any deceased general partner's interest for Good Will."The above summarized partnership agreement of January 1, 1941, was the latest of four successive partnership agreements, the first being dated February 24, 1927, which included both petitioners, and related to the business of Thomas Roberts & Co. Under these agreements two general partners were eliminated and two were added. Linton came in as a 10 per cent general partner under an agreement dated December 21, 1935. His interest increased to 20 per cent under the present agreement, and John came in under it as a 15 per cent general partner. Churchill had earlier been a general partner. The books of none of *852 the partnerships carried any amount for good will. Withdrawing and incoming partners neither received nor paid any amount for good will.
On December 31, *81 1940, Linton's capital account with the partnership amounted to $ 32,559.86, and on January 1, 1941, it was increased to $ 76,559.86 by a gift of $ 44,000 through assignment from the capital account of his father. On January 1, 1941, the capital account of John amounted to $ 8,000 which was assigned by way of gift from the capital account of his father in the separate amounts of $ 4,000 on December 31, 1940, and $ 4,000 on January 2, 1941. Other than these capital interests thus acquired by gift, the January 1, 1941, partnership agreement entitled Linton and John to no further partnership interests except as based upon future profits and losses.
The business of Thomas Roberts & Co. was operated as a partnership from 1858 to 1921, and as a corporation from 1922 through February 24, 1927, when the partnership which included petitioners was first founded. Petitioner Thrasher had been president of the corporation. The pre-1927 business combined many departments: coffee; dried fruit; specialties and imports (dealing largely with advertised brands); manufacture of relishes, mayonnaise and similar products; fresh vegetable brokerage; and wholesale canned fruit and canned vegetables. *82 By 1924 the corporation had proven itself a losing venture, and in that year its chief stockholder, George Roberts, took action to terminate its activities and to place its key employees with other concerns carrying on a type of business with which they were individually familiar. Activities did not terminate until early in 1927. The business had several hundred employees in 1905 and about 25 employees in 1927.
Petitioner Rothrock had been employed by Thomas Roberts & Co. from 1905 to 1918. He returned in 1924 with the understanding that he, Thrasher, and Churchill would form a partnership to perpetuate the department which carried on the commission canned goods business. This branch of the business had deteriorated up to 1924 by reason of neglect and the marketing of surplus war and refugee goods. On Rothrock's return that business from 1924 to 1927 was on the upgrade.
The partnership of February 24, 1927, assumed the name Thomas Roberts & Co., without cost and against the advice of Rothrock, who believed that previous competitors in the lines of goods then dropped would be reluctant to purchase canned goods from the new firm.
The sole assets of the 1927 partnership were $ 70,000*83 in cash contributions, some furniture, and leases of office space in New York and in Philadelphia.
Prior to November 30, 1940, the profits of the partnership were derived from three principal sources of business:
*853 (1) Commission sales, in which the partnership took conditional title to merchandise on a bill of lading; on receipt of the bill of lading the partnership remitted to its principal (the canner) a sum equal to the sales price, less commission and certain discounts, and the merchandise was thereafter sold at the price stipulated by the principal.
(2) Purchase sales originated as a convenience to canners who sold part of a season's crop through the partnership on a commission basis. A substantial balance of the crop which could not be disposed of immediately on the commission basis would be purchased by the partnership on its own account. By this means the partnership was able to take up the canner's crop for a full season, even though it was marketable only over a longer period, and the canner was given an added inducement to deal generally with the partnership. In these sales the partnership took sole title; it paid a stipulated price, less commissions and discounts; *84 and it resold the merchandise at the best price obtainable.
(3) Brokerage income comprised fees for introducing the purchasers to the canners, who then did their own billing, took their own credit risks, and entirely controlled the sale.
For the years 1936 through 1940 the partnership's gross profits from the various sources were as follows:
| Year | Purchase | Commission | Brokerage | Total |
| sales | sales | |||
| 1936 | $ 127,191.45 | $ 104,036.22 | $ 54.00 | $ 231,281.67 |
| 1937 | 56,437.23 | 73,946.10 | 111.68 | 130,495.01 |
| 1938 | 55,067.25 | 50,613.75 | 105,681.00 | |
| 1939 | 166,683.23 | 35,886.94 | 202,570.17 | |
| 1940 | 185,995.77 | 17,499.04 | 84.32 | 203,579.13 |
The success of the business depended upon the partnership's ability to obtain from canners the required quantities and quality of goods for sale, and this in turn depended on the abilities, experience, personal reputation, and special characteristics of the individual partners. The partnership maintained no contractual relationship with any canner, and the partners had to solicit their accounts personally and be able to render satisfactory service. The source of goods for sale was about 100 canneries located principally in Delaware, Virginia, *85 Pennsylvania, and New Jersey, only about 10 per cent of which had previously been represented by the old Thomas Roberts & Co. which had preceded the 1927 partnership.
There were comparatively few dealers in food products in the United States with which the old Thomas Roberts Co. had not negotiated or dealt at some time. About 50 per cent of the new partnership's customers had been customers of the old corporation.
The success of the business also depended upon the partnership's ability to obtain purchasers for the goods held for sale, and this in turn depended upon the abilities, experience, personal reputation, and *854 special characteristics of the individual partners. The purchasers were wholesale jobbers, chain stores, and government and institutional bodies, the identity of which was constantly changing. Purchasers such as the American Stores Co., William Montgomery Co., and the Frankford Grocery Co. purchased from many organizations similar to the partnership and, in deciding which organization from which to purchase, based that decision upon the quality and price of the merchandise offered for sale. The name Thomas Roberts & Co. was not itself a factor in the making*86 of a sale by the partnership to such purchasers, but a great deal depended upon the integrity, the personality, and experience of the representative.
The partnership owned no copyrights, patents, or advertised brands. It had no financing commitments other than an arrangement for credit with the Corn Exchange National Bank. The bank's financing was used only in certain periods of heavy shipments, and loans were secured by collateral notes executed by the partnership, as well as by accounts receivable or warehouse receipts. The contact with the bank had been made by petitioner Thrasher many years previously, when he did work for it, and that contact has been maintained by Thrasher to the present time.
On January 30, 1940, the Supreme Court declined to review the Federal Trade Commission's order, approved by the Third Circuit Court of Appeals, which held the Great Atlantic & Pacific Tea Co. to be in violation of the Robinson-Patman Act in its manner of purchasing from such firms as Thomas Roberts & Co. On September 4, 1940, the A & P notified the partnership of its preference to purchase goods directly from the sellers. The A & P further advised canners, whose products had previously*87 been sold by the partnership, that they could no longer sell direct to the A & P at a flat price if the canner at the same time sold through commission merchants who received any commission, discount or allowance in connection with the sale. The canners were thus schooled to sell to the large purchasing organizations at a flat price, without deduction for commissions, and in many cases the canners notified the partnership that, in lieu of selling through it, in the future they would sell direct.
On November 30, 1940, the Federal Trade Commission issued an order against the partnership and the individual partners to cease and desist from the business described herein as "purchase sales," the illegal act being the taking of a commission, allowance, or discounts in connection with the sales. In addition to requiring the discontinuance of all purchase sales, the commission sales were affected because they no longer could be solicited with the added inducement that the partnership would purchase additional goods on its own account.
During 1939 and 1940 Linton had developed the technique of government and institutional sales which were made through and in *855 the name of various*88 dealers who were regular customers of the partnership. In September 1940 it appeared that this business was to be susbstantially modified by reason of a new policy of direct Federal procurement of subsistence supplies based on open contract rather than on competitive bidding. After the cease and desist order issued against Thomas Roberts & Co., it continued to do that part of its business relating to the sale of merchandise to state institutions and branches of the Federal Government in the same manner as formerly, except that the sales were accomplished by the elimination of the wholesalers and middlemen through whom by the custom of the trade they had formerly dealt. In the earlier period Thomas Roberts & Co. performed the "ground" and "leg" work on this phase of business, but had retained the middlemen in the picture.
In December 1940 petitioners Rothrock and Thrasher were disturbed at the trend of events relating to the business and discussed the possibility of letting the partnership terminate at its stated expiration date, December 31, 1940. Linton was of a more optimistic view and expressed confidence in the government type of business. Later developments substantiated*89 his opinion and the business from 1941 on was closely related to the developments of Linton and John. In this new modification of the business the partnership was required to finance many of the canners in advance of obtaining their goods. For the most part the goods were purchased by the partnership, without deduction for commission, discount or allowance, and thereafter they were held for sale at the best price obtainable. A large percentage of their sales were made to government agencies on the partnership's own account.
In forming the new partnership effective January 1, 1941, and at the suggestion of petitioner Thrasher, John acquired a 15 per cent interest due to the marked business ability he had shown previously in developing business in the South. John had independent ideas and the partnership interest for him was also to prevent his leaving the firm to begin a business of his own. John had worked as an employee of the partnership since 1936; he had experience in soliciting the business of canners in Delaware, Maryland, Pennsylvania, New York, and New England; he had taken over the territories of Louisiana, Mississippi, Florida, and Georgia for immediate development; *90 he had worked in the principal office in Philadelphia; and he had acquired a thorough knowledge of canning, and in 1940 had qualified and acted as a government inspector and sampler. With Pratt Phillips, Jr., a friend for many years who was experienced in the canning industry, and who was the son of a large canner, John had conceived the idea of operating movable cannery equipment to follow the crop seasons from Florida to Maryland, and they had planned to begin *856 that business and had selected a starting point in Florida and an ending point in Maryland. This was immediately before the partnership agreement in question, and accounted for the offer to John of the partnership interest.
While working as an employee, John had been paid a nominal salary of $ 15 weekly, plus expenses. This was regarded as a characteristic practice of the grocery business.
For some years Linton had demonstrated his ability in the partnership business. Prior to 1930 he had accompanied petitioner Rothrock during summer trips to visit canneries in Maryland, Delaware, and Virginia; he had worked as an employee for the business from 1930 through 1935; and from 1936 through 1940 he was a 10 per cent*91 general partner. From 1930 through 1934 he solicited and purchased goods from canners and gained general experience in the Philadelphia office in the winter time, and he worked in the New York office during 1935 as a salesman and as understudy to the then 33 1/3 per cent resident general partner, Wainwright Churchill. Churchill retired as a general partner at the end of 1935, and from that time Linton has been manager of the New York office and performed all the duties previously carried out by Churchill. Linton traveled a good deal in the field; he developed the upper New York State territory and acquired many new accounts; and his personal sales as well as those of his salesmen for the period 1936-40 increased over a similar prior period in which Churchill managed the New York office. Linton acquired the technique of making successful competitive bids and it was largely due to his efforts that the government and institutional business for the partnership developed.
Petitioners Thrasher and Rothrock felt that the partnership business would benefit by obtaining the services of Linton and John in exchange for their respective 20 per cent and 15 per cent partnership interests; they*92 believed that the partnership's future depended in substantial part on the services to be rendered by Linton and John, and would have offered a like partnership interest to any other party having the same services to offer to the partnership. Linton believed he was entitled to a total 30 per cent partnership interest, since he had successfully taken over the position and responsibilities of a 33 1/3 per cent partner.
In 1940 and 1941 Willoughby J. Rothrock gave cash gifts to his son Willoughby J. Rothrock, Jr., in the same amounts as those to his son John. Willoughby, Jr., had decided upon the profession of medicine, and for many years had studied for it at considerable expense to petitioner.
During 1941 and until April in 1942 the partnership took a 5 per cent mark-up on sales made by it. After April 1942 the partnership was classified by the Office of Price Administration as a "wholesale *857 service dealer," under which it was entitled to and did receive a 13 1/2 per cent mark-up. On August 5, 1943, a redefinition of terms by the O. P. A. disqualified the partnership as a "wholesale service dealer" and it reestablished the 5 per cent mark-up for one month, and in September*93 1943, on advice of counsel, ceased that practice. Following the filing of a protest, on May 9, 1944, the O. P. A. issued its order and opinion adverse to the partnership. Profits actually increased under O. P. A. ceilings, a typical example being where the cost of the first delivery of a particular product is the basis for a percentage mark-up, and the cost of that delivery is legally boosted by long distance freight and handling costs.
In the years 1941 through 1945 the general partners of Thomas Roberts & Co. received as profits, salaries, interest, life insurance premiums, and reserve for discount the following amounts:
| 1941 | 1942 | 1943 | 1944 | 1945 | |
| W. W. Thrasher | $ 125,893.08 | $ 110,040.36 | $ 80,871.87 | $ 22,074.94 | $ 27,287.17 |
| Linton A. | |||||
| Thrasher | 122,815.37 | 108,271.11 | 81,492.43 | 29,890.39 | 30,338.02 |
| W. J. Rothrock | 102,650.88 | 87,932.78 | 62,953.86 | 15,206.20 | 19,063.57 |
| John H. Rothrock | 58,922.79 | 52,153.54 | 38,220.56 | 10,351.10 | 11,715.42 |
Their respective approximate annual salaries for these years (included in the above figures) were as follows:
| W. W. Thrasher | $ 7,800 |
| Linton A. Thrasher | 5,200 |
| W. J. Rothrock | 5,200 |
| John H. Rothrock | 1,820 |
Thomas *94 Roberts & Co. is regarded in Philadelphia as an old reliable and established concern. Some customers who dealt with the predecessor companies continued to deal with Thomas Roberts & Co. after the formation of the new partnership.
Petitioner Rothrock knew that if his only gifts in 1941 were the $ 4,000 cash gifts to each of his sons he would not be required to file a Federal gift tax return for that year. He first realized that he might be required to file a 1941 return when a revenue agent, through the partnership's auditor, so informed him in October 1944. Promptly after being so informed, and on October 9, 1944, he filed a 1941 Federal gift tax return, but reported therein only the cash gifts above referred to.
OPINION.
As in , decided herewith, the question is the taxability as a gift of an interest in a newly created family partnership. Unlike that case, however, this record deals at length with circumstances tending to show that business considerations rather than family relationships dictated the result. There were no *858 valuable manufacturing tangibles or exclusive processes, products or trade names. The*95 issue, as we see it, narrows to whether the prospective earnings of the sons were attributable purely to personal services, or partly to the contribution made by the existence and continuation of a going concern -- in other words to a share in presently valuable business prospects, comparable to good will, which being the property of the old partnership was in some measure transferred to them as members of the new firm.
It is not requisite to put too fine a point upon the principle involved in that distinction. If in fact there were no future earnings inherent in the business itself, it matters little whether we say, as a matter of law, there was a gift, see , but its value was so negligible as to eliminate it from practical consideration; or the value being absent, the consideration passing could not fail to be full and adequate; or, there being no existing vehicle for the transmission of future earnings in such a purely personal service business, cf. ; , there was*96 nothing which could be the subject of a gift. On any approach the result is identical.
Our interpretation of the evidentiary facts leads us to the ultimate finding that petitioners have borne their burden of showing that the business by itself possessed no substantial element of future earning power or good will, but that, on the contrary, its income was derived primarily from personal services, so that different participants with similar abilities, experience, and contacts could have organized a comparable venture and enjoyed a parallel success from their contribution of time, skills, and services. See, e. g., . This factor, coupled with the proven capacity of the respective sons and the value to the business of their contributions, results in our inability to discover any gift of interests, tangible or intangible, direct or indirect, to which the tax could attach.
Respondent's determination seems to us to have been in error.
Decision will be entered for the petitioners.